Bad Incentives Increase Costs

In early June this year, the New Yorker published an article by Dr. Atul Gawande. He is not only a writer for the New Yorker but a practicing surgeon. Dr. Gawande was made aware of the sky high costs of medical care that were occurring in one small city, McAllen, in Texas in comparison to surrounding small towns and cities with similar population demographics. Gawande attempts to find out what the cause is by examining the overall population health, care received, technologies available, and so forth.

What was surprisingly found was that the cost was being promoted by overuse, overactive healthcare driven by bad incentives. These incentives were first introduced when McAllen's hospitals suffered from a major malpractice suit. However, due to the suit, a price cap was put on the amount of money that could be rewarded for a pain and suffering case. Because of the price cap, you would naturally assume that the cost would go down. However, costs started to go up, and malpractice suits plummeted.

Gawande discovered that that malpractice suit gave doctors the incentive to run more tests, prescribe more drugs, and perform more procedures in situations where they might normally wait it out due to paranoia. Additional incentives were added when they received supplement incomes for the tests used, and prescription drugs used. The patients in the hospital saw little no increase in their health due to the extensive testing and superfluous procedures. Gawande compares McAllen to other hospitals that salary their doctors and don't allow patient healthcare to create incentives, the costs of healthcare went down.

Gawande discovered a very important area of action and reaction that can lead to snowball effects like the current healthcare state. The question he poses is: How conservative should a doctor be in administering medicine? How can society regulate the incentives placed upon doctors? And how much control do the doctors themselves have over these incentives?